Banking scandals dates back in history and can be traced up to the time of rudimentary banking and the system of money. Historical events such in the 1630s the Tulip Mania and the 1720s South Sea Bubble lead to the development of some major concerns regarding the dangers and risks involved in the field of accounting. As the paper seeks to focus on discussing the role of accounting in recent banking scandals in light of accountability, representation and control issues it is imperative to have a clear understanding of the three notions. This is because they are considered to be the main factors leading to the banking scandals. Accountability refers to the process of identification, measurement and communication of financial data and information regarding an organization to allow for informed decisions and judgments (Lehman 2005, p.980). Representation involves is central in accounting due to the fact that it enables an organization to have a proper presentation of is financial performance numerically and simplified manner (Ezzamel, Lilley and Willmott 2004, p. 790). This eases interpretation of the financial status of an organization and the determination of whether it making losses or profit. Control is basically about making sure that activities within an organization are heading in the right direction. Therefore, it is the notion of directing and overseeing which involves the application of regulations and monitoring. The practice of accounting is a well known activity that is meant to ensure that there is proper monitoring and regulation of activities in an organization. It is thus considered to be part of the control process (Catchpowle, Cooper and Wright 2004, p. 1040).
The purpose of this paper is to address the recent banking scandals by discussing the role of accounting in recent in the scandals in light of accountability, representation and control issues. It is vital to have a clear understanding of the three notions in order to know the different aspects of failure by banks during the wake of the financial crisis in the year 2008. The paper in divided into several sections. The first section is an overview of Bear Stearns Investment Bank. It provides a summary that outlines the health of the organization since its inception and losses made following the onset of the global recession. The second section is about Bear Stearns and the issues of accountability, representation and control. It looks at how the banking scandals involved bankruptcy of the firm’s hedge funds. Additionally, it addresses the issues of accountability, representation and control in a more succinct manner and their relation to Bear Stearns’ banking scandal. The third section is on the LIBOR banking scandal in Barclays. It provides a clear understanding of the role of LIBOR, its use by financial institutions as well as its association with issues relating to accountability whereby it outlines the nature of the scandal such as manipulation of LIBOR involving attempts to engage in the manipulation of rates with the main aim being benefiting derivatives traders and furthermore the lack of accountability leading to the misrepresentation of rates during the time of the financial crisis (Krugman 2009, p. 44). The fifth section is on the Manipulation of LIBOR rates for Protection of Barclays’s Reputation during the recession. It provides a concise view of the reason behind Barclays Scandal with respect to safeguarding its reputation. The sixth section focuses on the representation, control and accountability issues in the manipulation of LIBOR by Barclays bank. In this section the paper addresses how the manipulation of LIBOR is linked to issues of representation, control and accountability as far as accounting is concerned. The seventh and final section is the conclusion which summarizes that paper providing opinionated views regarding the banking scandals.
An overview of Bear Stearns investment bank
It is crucial to note that banking scandals significantly affects the global economy and to a very greats shakes the investors’ confidence to make investments and willingness of the people from the general public to save (Chwastiak and Young 2003 p.550). Bear Stearns firm sued in the year 2009 for issues related to accountability is one of the major companies in the world to appear on the list of banking scandals. In the year 1923 was when this firm was established in the United States being “an equity trading house” at the time (Banks, Blundell and Smith 2002, p.69) .. Its founders were Harold Mayer, Robert Stearns and Joseph Bear who began it with a capital base of $500,000 (Keasey, Thompson and Wright 2005, p.78). The firm later became a leading global bank for investment, brokerage and trading of securities. In the year 2007, December Joseph Bear made a declaration that the firm had made losses during the fourth quarter amounting to approximately $854 million or $6.9 as the cost of each share. In 2008, March through coordinated activities with New York’s Federal Reserve Bank (FRB) an agreement was arrived at whereby the FRB gave out a non-resource loan amounting to $30 billion to aid JP Morgan Chase & Co. to merger with Bear Stearns Companies, Inc. Bear Stearns was thus acquired at a cost per share of $10 by JP Morgan Chase & Co (Parmes, Leonetti, and Phelan 2008, p. 60). Banking scandals as experienced by Bear Stearns firm appear to be more pronounced in the year 2007 when the firm reported huge losses in its investments in the derivative markets and mortgage backed securities (Volling and Wolfe 2008, p.95).
Bear Stearns and the issues of accountability, representation and control
Before ending up in a banking scandal and experiencing huge losses, Bear Stearns firm is reported to have made fortunes between year 2005 and the year 2007. It appeared to be highly admired as a bank that traded securities (Shapiro and Matson2008, p.200). The successfulness of the firm within the banking industry was attributed to a number of activities namely business innovation, quality management of risk and employee talent. Nevertheless, later on these positive outcomes appeared to be ironical. In the year 2007, July two “subprime hedge funds” were bailed out by the firm. There was improvement of the firm’s leveraged funds since it had a “High-Grade structured Credit.” Following a state of rapid decline in subprime mortgages value there was a consequent decline in the value of the firm’s funds. This led to an inevitable loss in the firm’s investors which amounted to $1.6 billion (Eichengreen 2009, p. 83).
Following the bankruptcy of the firm’s hedge funds there were some major concerns arising in relation to the exercise of accountability, representation and control by the managers of the firm who were in charge of the management of the funds. Arguments against the firm’s management team were posed in that they had misrepresented and concealed the true or rather real financial position and performance of the firm and therefore misleading investors (Zweig, and Gillespie 2014, p.33). In the year 2008, on June 19th two managers of the firm were received indictment relating to accountability and United States prosecutors accused thus accused them of securities fraud. The firm appeared to be in a number of banking scandals situations due to poor control by management. In the year 2009, on November 10th the two managers were discharged an action by the court that appeared to be very disappointing in the face of investors. Nevertheless, the acquittal could most possibly have signaled a series of charges directed against the Wall Street Executives with the main argument being they were responsible and to blame for the financial recession (Muolo and Padilla 2008, p. 40).
Looking into Bear Stearns investment bank there was poor control with respect to how the managers exercised their power. It appeared that they put their interests first before those of the firm’s shareholders. This basically seems to have misused the power of management in Bear Stearns. In banks and other financial institutions accountability is associated and is always about the operation of capital (Simons 1990, p.103). Faced with the opportunities and possibilities of maximization of profit the managers from Bear Stearns firm lost their integrity and honesty principles which led to banking scandals. The senior management in this investment firm did not succeed in the proper implementation of their accountability, representation as well as control duties and responsibilities due to the fact that they were busy focusing on the maximization of their own personal fortunes (Fatien, Raufflet and Mills 2013, p.30). There is clear evidence that investors presented complaints that the outcome of their investments greatly differed from the investment strategies described to them. This demonstrates that there is failure in the part of the management to ensure that greater value in terms of representation and accountability was attached to investors’ contributions (Young 2006, p.580).
The LIBOR banking scandal in Barclays
The London InterBank Offered Rate otherwise known as LIBOR underwent establishment in the year 1986. As a major financial benchmark it was established with an estimated value of its financial instruments approximated to be about $300 trillion. LIBOR is to a very extent associated to issues relating to accountability, representation and control of banks as far as their accounting activities and operations is concerned (Rezaee 2005, p.280). In the year 2012, on 27th June the Barclays Bank engaged in some kind of settlement valued at $360 million with the Commodity Futures Trading Commission (CFTC) and the United States Department of Justice (DOJ) following its attempts to engage in unlawful manipulation of LIBOR in between the years 2005 and 2009. Additionally, Financial Services Authority (FSA) in the United Kingdom fined the Barclays Bank a sum amounting to $92.5 million due to attempts made to engage in the manipulation of LIBOR. Following Barclays’ banking scandal financial authorities engaged in the expansion of their investigations regarding LIBOR over fifteen other banks.
LIBOR is basically “a representation of the lowest real-world cost of unsecured funding in the London market.” In this case, financial organizations such as banks makes use of LIBOR for several financial instruments such as student loans, credit cards, mortgages, options, futures and swaps. Guidelines that govern calculations relating to LIBOR undergoes establishment by the foreign exchange and money markets committee (FXMM). Furthermore, the committee serves the role of selecting financial institutions and banks that will become part of the panels. It is crucial to note that the United Kingdom trade association and the British Bankers’ Association (BBA) have the sole responsibility for financial and banking services (Bain and Howells 2004, p.35). They created and ensure that LIBOR guidelines do not undergo any form of manipulation. In any case, the regulation of LIBOR is not under the government of Britain. The FXMM engages in the selection of member banks of the panel based on a certain criteria. Some major considerations are made on the various features of the bank such as its credit rating, market activity and expertise.
The Banking Scandal at Barclays Bank
The banking LIBOR scandal at the Barclays bank upon investigations presented two major kinds of manipulation of LIBOR namely attempts to engage in the manipulation of rates with the main aim being benefiting derivatives traders and secondly the lack of accountability leading to the misrepresentation of rates during the time of the financial crisis (Hoskin and Macve 1988, p.55). Basically with respect to the second scandal the Barclays bank submitted false rates the protection of its reputation during the period of the financial crisis.
Manipulation of Rates for the Purpose of Benefiting Derivatives Traders
From the year 2005 to the year 2009, derivatives traders from Barclays bank engaged in some major attempts to manipulate the LIBOR. They did so by presenting requests that those individuals responsible for submitting rates to engage in the submission of rates that would be of benefit to them in terms of their position of trading rather than submitting rates in conformity with definition of LIBOR (Hall 2013, p.154). In this case, the submitters of the rates fulfilled at least 70% of the requests made and therefore engaged in some of misrepresentation. They submitted untrue rates to illegally Benefit Barclays traders from the year 2006, January 3rd to the year 2007, August 6th. Furthermore, Barclays bank was incompliance with interbank requests as the manipulation of LIBOR was concerned.
It is imperative to note that while there is internal manipulation of the LIBOR rates by the Barclays bank some major concerns come to light. This includes the fact that the interbank collusion leads to a greater risks and threats because there is increased possibility of successful manipulation of LIBOR rates through coordinated effort. Additionally, former workforce from the Barclays bank made a total of 12 requests calling for the submission of untrue LIBOR rates. Therefore, the Barclays LIBOR banking scandal involved the joined efforts of external traders and Barclays traders to engage in the manipulation of LIBOR rates during the periods when derivatives Traders could achieve maximum benefits. The manipulation benefited traders from Barclays through the reduction of their losses to the disadvantage of other parties in the trading arena.
Manipulation of LIBOR rates for Protection of Barclays’s Reputation during the recession
One major reason that tries to provide an explanation of Barclays bank LIBOR banking scandal is the understanding that bank made ,attempts to engage in the manipulation of LIBOR rates to safeguard itself from the 2008 global financial crisis. The bank basically submitted “dishonestly low estimates of bank borrowing costs” during the period of the financial crisis (Arvedlund 2014, p.67). Due to the fact LIBOR is a representation of the cost of borrowing funds by bank; there are some participants in the financial market who basically views LIBOR rates submission as a reflection of the financial health of the financial industry. In this case, when the submissions are high it could be a possible indicator that a given bank is facing some problems with its liquidity.
From the year 2007, on the month of August to the year 2009, on the month of January, Barclays bank engaged in the submission of lowly estimated LIBOR rates with the aim of suppressing concerns regarding its financial health. Additionally, following some negative publicity of the bank its management team ordered those responsible for submitting LIBOR rates to make sure that the rates were within the limit of 25% and basically not high to the extent of attracting attention towards the operations of the bank (Hall 2013, p.165). At this period, there was a section of employees from Barclays bank who made attempts to make known to FSA and BBA that there was dishonest submission of low rates by the banks. Furthermore, there were some regulators who apparently were aware of the scandal and actually condoned the manipulation of LIBOR rates.
Representation, Control and Accountability Issues in the Manipulation of LIBOR by Barclays Bank
The issue of misrepresentation arises in the Barclays bank LIBOR scandal since there was no proper administration and control over the submission of LIBOR rates (Margaret, Abernethy, Johannes and Stoelwinder 1995, p.43) Failure of regulation of the LIBOR submissions in accordance with the law creates the conditions necessary for the manipulation of LIBOR thus leading to the regular misconduct by the bank to submit dishonest rates. There was failure for the regulation of LIBOR rates submission in terms of accountability as symbolized by adequate analysis of the calculations and representation as indicated by adequate evaluation of the rates to ensure proper illustration and publication. It is such failure for comprehensive regulation that paved way for the Barclays LIBOR scandal after which the bank received some penalties due to its violation of trade and business and failure to comply with LIBOR guidelines with respect to administration and submission.
Control as already mentioned implies to the process of management of activities and operations through monitoring and regulation (Power 1997, p. 135). Control as a function is carried out by managers whose main aim is to ensure that they are able o engage in promotion of accountability at an individual level (Armstrong, 2002, p.290). Furthermore, the role of control makes sure that managers have a clear understanding of what their positions entail and what is required of them as far as management activities, practices and operations within the organization are concerned (Cooper, and Robson 2006, p. 417). The LIBOR framework failed to provide clear control requirements for bank managers. Furthermore, the FSA did not have adequate power to penalize individuals and financial institutions that engaged in the violation of LIBOR guidelines. This state of affairs created room for the manipulation of LIBOR rates by Barclays bank and therefore decreasing the confidence of its investors.
There are some major weaknesses in the LIBOR framework which lead to the conditions necessary for the issues of control, representation and accountability to arise. These weaknesses include the lack of sufficient oversight, inadequacy in terms of independence of the structures of governance and limited accountability and transparency (Bryer 2006, p.580). The BBA’s involvement in the management and control of the LIBOR process made it difficult for it to credibly engage in the administration of the benchmark due to its close associations and relations with contributor banks. This significantly contributed to the Barclays LIBOR scandal. The BBA could not entirely account for the bank’s operations.
By the BBA ensuring that it relinquishes its accountability and responsibility for LIBOR and leaving this role for private organizations then there would be proper management and administration of LIBOR without any points of jeopardy. BBA as LIBOR’s administrator failed to effectively have control over Barclays bank as a contributor bank. It was not able to follow up on the representation and accountability details of this bank’s operations closely (Ojo 2013, p. 40). One of the main reasons for this was that BBA exhibited similar interests as contributor banks. In any case, LIBOR’s administrator was required to engage in the development of certain principles and ideas that would act as a guide its oversight practices and therefore make sure that banks remained transparent and accountable through proper representation. It appears that the BBA failed to adequately focus on non-discriminatory and fair access to LIBOR. Additionally, the BBA failed to analyze and examine LIBOR rate submission by Barclays bank hence was not able to discover such manipulations of the LIBOR framework and guidelines (McLean and Nocera 2010, p.48).
The issue of representation goes hand in hand with the understanding and concept of transparent reporting. The Barclays scandal succeeded due to the lack of a law calling for the delay of publication of LIBOR rates and making sure that there is reduction of the number of indexes under publication while at the same increasing the size of the panel. Barclays bank found a leeway in this context since BBA engaged in the publication of LIBOR rates on a daily basis. As much as the BBA main focus was to foster accountability and transparency it gave banks an incentive to simply submit untrue LIBOR rates (Kenyon and Stamm 2012, p.70). One of the key factors that led to the Barclays LIBOR scandal was the ability by the bank to make predictions on how submissions would stand a chance of influencing the LIBOR rates. Nevertheless, delaying the representation, submission and publication of the rates for a certain period of time could have provided the BBA with ample time to make further assessments and approve that there was enough transaction data in support of the rates under submission.
Banking scandals are a major threat to the financial health of organizations and the global financial market. As demonstrated in this paper the issues of accountability, representation and control played a major role in leading to the Bear Stearns investment bank and Barclays bank scandals. These issues needs to be adequately addressed in order to ensure that the future of the banking sector is safeguarded especially in terms of making sure that investor confidence is not reduced. The Bear Stearns investment bank scandal clearly identifies flaws within the senior management as far as proper implementation of their accountability, representation as well as control over its responsibilities is concerned. A loop hole has been identified whereby senior managers of the organization appear to focus on the maximization of their own personal fortunes to the detriment of the interests of the organization’s shareholders. With respect to Barclay bank it is imperative to note that the only solution to the problem of submission of false rates is simply rooted in proper examination of the indexes before publication. This would in turn ensure that indexes that lack support by transaction data do not get published. Furthermore, a large panel would increase the credibility and accuracy as far as the administration of LIBOR is concerned. It is crucial to note that a large sized panel would reduce a single bank’s ability to influence LUBOR rate. It would basically increase LIBOR’s representation enhance participation by banks as well as their operations in the financial markets.
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